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May 29, 2012

3 Major Changes to 529 Plans

Happy 529 Plan Day! Be aware of the following items

It might not get the attention it deserves, as it competes with Learn About Composting Day, but today is 529 Day, and we hope you don’t overdo it when celebrating.

“Yes, everything has its own day now, including 529 college savings plans, those state-sponsored accounts for college savers in which any earnings are tax-free as long as they are used to pay for qualified higher-education expenses,” Kelly Greene writes on The Wall Street Journal’s Total Return blog.

But it’s not as frivolous as it might sound. A recent survey form Edward Jones regarding 529 Plan awareness asked respondents to correctly identify what a 529 plan is; choices ranged from “a form of life insurance” to “a retirement savings plan.” According to the findings, 62% of Americans do not know that a 529 plan is a college savings plan.

The survey also found:

Awareness of 529 plans rises with the wealth level of those surveyed

Respondents who have college degrees were much more likely to correctly identify 529 plans

Only about half of respondents with children knew about 529 plans

For those who currently have a 529 plan, Greene notes a number of changes in 529 investment options in the past year, as families search for less-volatile offerings.

“States have been lowering fees and adding FDIC-insured certificates of deposit and bank-savings accounts, age-based investing options that scale back stock investments for older children and volatility tools," Greene wrote. "Deciding whether you need such features depends in part on your 529 plan and the age of the beneficiary.”

With that, she lists some issues you (and your client) should keep in mind:

529 plans may negotiate better CD rates than you could get on your own. But some 529-plan money-market funds have negative returns after program expenses.

529 plans are adding funds managed by other firms—but adding those options increases the fees.

Although you can only change your asset allocation in a 529 plan once a calendar year, you can change it any time you change your beneficiary.

Savingforcollege.com, a company that educates individuals and advisors on college savings, is hosting a “conversation” for anyone with questions on 529 plans today on Twitter. You can join it by following @saving4college and using the hashtag #529Day.